Stop Managing Your Margins and Watch Your Profitability Soar

Stop Managing Your Margins and Watch Your Profitability Soar

Driving profitability improvement throughout an organization can be achieved in a variety of ways. Any number or combination of profit drivers can be leveraged to improve financial performance. However, all too often we see companies focused on just the margins themselves and not what’s driving them.

Consider the sales team that is measured or rewarded based on margin. Margin performance can fluctuate over time based on any number of changes to profit drivers including volume, pricing, product or customer mix, and costs. Sales teams have influence or control over some, but not all, of these profit drivers. So why hold them accountable or reward them based on overall margin performance?

Instead, hold sales accountable only for the profit drivers they can influence. Take, for example, a wholesale distributor sales team. They certainly have influence over sales volume. It’s part of their job description to positively affect volume. They typically have influence over pricing, too. Through targeted margin-based pricing, discounting and promotions, sales teams influence prices every day. And we know that pricing has very high leverage on profitability.

Consider too, product mix and customer mix. Sales teams have at least some influence over what gets sold and to whom. This is one profit driver that is not measured in many companies but often cited as a reason for declining margin performance.

Finally, costs can have tremendous impact on margins. But the sales team typically has little or no influence over costs. So why hold them accountable for overall margin performance when costs are such an integral component of it?

The way to positively impact your margin performance is to manage more deeply into the profit drivers that impact margin. Margin is a result or outcome of these drivers and not a lever in itself. Identify which profit drivers are within the control of your sales team, or any other function, and manage those drivers to get your desired margin result.

In the case of the wholesale distributor sales team, you will manage volume, price and mix to improve margins. This means monitoring their performance on each of these relevant drivers, and reporting and rewarding accordingly. Because cost is not part of this equation, using overall margin performance as the basis for evaluating sales performance is neither appropriate nor advisable.

We recognize that this line of thinking may be a leap based on how you measure sales performance today. But think about it: Sales teams rewarded on margin will close deals based on margin dollars and tend to ignore the other profit drivers available to them. When you manage these drivers and hold your sales representatives accountable for them, they will pivot toward the profit drivers they can influence and, in turn, improve margin performance.